Weighted Average Cost of Capital (WACC)

 Financial evaluation brief the management, investor and financial analyst that how the company is managing its operations and the functions. An investor is always suggested by the market analyst and financial analyst to identify and evaluate the financial position and performance of the company first and then make a decision about the investment in the company. Financial evaluation includes the process of evaluating the financial statements through conducting the study of ratio analysis, capital asset pricing method, vertical analysis method, horizontal analysis method, weighted average cost of capital etc. These methods assist the investors to evaluate the actual worth of the company so that a good decision could be made.  

1. Company description:

LITHIUM AUSTRALIA NL is an Australian company which is operating its business under Metals and Mining industry. The main function and operations of the company is acquiring, exploring, and developing the mineral properties. The company manufactures lithium carbonate for battery grade from lithium micas. The company is operating its business in international market. It supplies it product and services to worldwide. The main vision of the company is to cover the international market and serve its services and the products to overseas (Bloomberg, 2018). This company has put the energy storage, lithium batteries and electric car very quickly and efficiency in the global market. The company has manufactured the lithium batteries in cheaper price through adopting the new technology. Various financial analysts report express that this company is the best option for the purpose of investment as it would offer huge profit and return to the investors.

1. Ownership governance structure:

Fir evaluating the worth of the company and the position of the company, study has been done over corporate governance of the company and the board directors and members of the company:

Through the evaluation on annual report of LITHIUM AUSTRALIA NL, it has been found that the main shareholder of the company is JP Morgan Nominees Australia Limited. The company has the largest share of stock of the company which is around 4.906. Any of the shareholders of the company does not have 5% or more than 5% shareholdings in the company. Following picture would depict about the top largest stockholders of the company and their total share % in the total stock of the company. Totally, 31.742% of the company stock is hold by the top 20 shareholders and rest stocks are held by the other stockholders of the company.

Dividend Policy

(Annual Report, 2017)

In addition to it, chief financial officer, chief executive officer, directors, executive directors, non executive dissectors, board of directors etc has been analyzed and found that how much stock are held by these main people of the company. Adrian Griffin is the managing director of the company and he is managing the resources and the operations of the company very effectively from last few years (Ross et al, 2007). He has 2.28% of stocks of the company. More to it, George Bauk and Bryan Dixon is the non executive officer of the company and they have few stocks of the company. Barry Woodhouse is the CFO, CS, Director and the chairman of the company. In addition, none of the main people of the company held 5% or more than 5% stocks of the company.

1. Performance ratios:

Further, for evaluating the financial position and the worth of the company, performance ratios have been done. The performance ratios of LITHIUM AUSTRALIA NL are as follows:

Return on assets is the part of performance ratios. Basically, it is an indicator which explains that how much profits have been earn by the company in relation to the total assets of the company (Ward, 2012). Return on assets offers an idea about the efficiency, profitability etc to the management, analyst, and investors through using its assets to manage and generate profits. Following is the calculations of ROA of LITHIUM AUSTRALIA NL:

Above calculations brief that the total profit of the company was $ -4592 and the total assets of the company was $ 16027 and thus the ROA of the company is -28.652% which express about the loss position of the company. Company is suggested to make few changes in its operations and the expenses to reach over a profitability position.

Return on equity is the part of performance ratios. Basically, it is an indicator which explains that how much profits have been earn by the company in relation to the total equity of the company. Return on equity offers an idea about the efficiency, profitability etc to the management, analyst, and investors through using its equity to manage and generate profits. Following is the calculations of ROE of LITHIUM AUSTRALIA NL:

Above calculations brief that the total profit of the company was $ -4592 and the total equity of the company was $ 15128 and thus the ROE of the company is -30.35% which express about the loss position of the company. Company is suggested to make few changes in its operations and the expenses to reach over a profitability position.

Corporate Governance

Debt ratios express about the position of the company in terms of managing the better capital structure. Debt ratios analyze the value of the company and assist the company to maximize it. Debt ratios offer a balance among the total assets and total liabilities of the company (Simons, 2007). It helped the company to make decision about the fund raising source. Following is the calculations of debt ratios of LITHIUM AUSTRALIA NL:

Above calculations brief that the total liabilities of the company was $ 898 and the total asset of the company was $ 16027 and thus the debt ratios of the company is 5.60% which express about the bad capital structure position of the company. Company is suggested to make few changes in its operations and the expenses to reach over a good capital structure position.

TA/OE:

Ta stands for total assets and OE stands for ordinary equity. Total assets decide the return on asset position. The more, the total assets of an organization, the more the expectation of the company would be about the total profit of the company. It explains about the total resources which have been used to manufacture the product so company is required to keep minimum resources and utilize it as its maximum. At the same time, total equity decides the return on equity position. The more, the total equity of an organization, the more the expectation of the company would be about the total profit of the company. It explains about the total funds which have been used to manufacture the product so company is required to keep minimum funds and utilize it as its maximum.

ROA and ROE:

ROE stands for return on equity and at the same time ROA stands for return on assets. As discussed above, assets and equity makes an impact over the ROA and the ROE of the company and it also explains that the more the total assets and equity of an organization would be the less the ROA and ROE would be respectively. And accoridng to Net Mining Boom (2018), total assets would always be greater than the total equity of the company because it is the sum of total liabilities and total equity of the company thus the ROE would always be greater than n the ROA of the company..

1. Changes in stock price:

In addition, for analyzing the value of the company, stock price of LITHIUM AUSTRALIA NL of last 2 year has been analyzed and it has been compared with the stock price of all ordinary shares of Australia. Following is the changes and the difference in both the stock in last 2 years:

Performance Ratios

(Kaplan and Atkinson, 2015)

The changes in the AORD and the chnages in the stock price of LIT have been shown in the above graph and it has been evalauted that the stock of LIT is quite stable whereas various chnages have occurred into AORD stock. It epxlains that the stock price of AORD is quite volatile. Though, the study of corerelation have been conducted to evalaute the voltaivlity level of the stock and it has been found that the corerltion among both the shares are -0.25 which epxlains that the shares of the company are less volatile (Macintosh and Quattrone, 2010). Beta study has also been done over LIT to evalaute the systematic risk of the company and it has been found that syste,atc risk of the company is 0.69 which express about moderate risk of the company in compariosn of the industry risk. This report epxlains about the actual market position of the company.

1. Significant factors:

The above evaluation over the stock price of the company explains that the stock price of the company has not been changed a lot. Though, sometimes the stock price of the company has been $ 0.08 from $ 0.20 and at the same time it has raised up to $ 0.25. These sudden changes have taken place into the stock price of the company due to the following reasons:

1. Analyst forecast:

Financial analyst have reported once in their report that LIT is the one of the best mining industry and the revenues and the profit of the company would e enhanced in near future. After this announcement the stock price of LIT has been enhanced.

1. Significant management changes:

Significant management changes have been done by the BOD of the company and due to that the attractiveness of the company has been enhanced. After this announcement the stock price of LIT has been enhanced (Davies and Crawford, 2011).

1. Competitors impact:

Further, the competition and the new technology uses by the competitive companies have also affected the stock price of the company and due to it; the stock price of the company has been lowered.

1. Industry wide factors:

Further, the factors and the changes in the industry have also affected the stock price of the company and due to it; the stock price of the company has been enhanced (Next Mining Boom, 2018).

1. Law suits:

Lastly, a law suit has been won by the company in last year and it has directly impacted over the stock price of the company (Horngren et al, 2005).

1. Calculation of CAPM and beta values:

Stock Price Analysis

Beta:

Beta represents the systematic risk of an organization. Beta of LIT is 0.69. It expresses that the systematic risk of the company is moderate (Yahoo Finance, 2018).  

CAPM:

CAPM calculations have been done in addition to evaluate the required rate of return. Following is the calculation of CAPM:

The chosen company is a not a conservative investment. As the financial and market position of the company is below average and the company has faced huge loss in last 2 years which explain that the chosen company is not at all good in the perspective of investment.

1. WACC calculations:

It explains about the total cost of the company which would occur while raising the funds. The current cost of the company is 5.38% out of which 3.5% is of debt and 5.38% is of equity of the company (Annual Report, 2017).

More, the WACC calculations explain that the WACC of the company is quite lower and thus the investment proposal which would offer more that 5.38% of internal rate of return would be a good opportunity for the company. The lower the cost of the company would be, the higher the company would be able to make earnings. More, if the company would raise the funds through debt, than the cost of capital of the company would be lower more and the earnings opportunity of the company would be higher.

1. Debt ratios:

The calculations over the debt ratios of the company explain that the capital structure of the company is not at all good. Total assets of the company is quite higher than the total liabilities of the company. Following is the ratio of total asets and total liabilities of the company:

This explains that the debt ratio of the company was 5.57% in 2016 and 5.60% in 2017. It explains that the total liabilities of the company are required to be enhanced and the funds must be raised by the company through debt to make an optimal capital structure. The current capital structure of the company is quite stable but few changes are required to be done by the management (Davies and Crawford, 2011).

Further, gearing ratios of the company explains that the gearing position of the company has been enhanced by 0.05% in 2017. It explains that the capital employed of the company has been enhanced in 2017 and this has taken place due to high reserves and high issued capital of the company.

The current capital structure of the company is quite stable but few changes are required to be done by the management (Morningstar, 2018).

1. Dividend policy:

Further, it has been evaluated that the company has not paid any dividend in financial year 2017 which explains that this company is following the rule of irrelevant dividend policies which express that the profits must be kept by the company itself for the future investments (Bromwich and Bhimani, 2005). Irrelevant dividend policies in good for the organization as the company do not need to raise the funds from the market and could make an investment through retained earnings but at the same time, it loses the attractiveness and trust of investors.

1. Recommendation and Conclusion:

 To conclude, the chosen company is a not a good option for the investment. As the financial and market position of the company is below average and the company has faced huge loss in last 2 years which explain that the chosen company is not at all good in the perspective of investment.

References:

Bromwich, M. and Bhimani, A., 2005. Management accounting: Pathways to progress. Cima publishing.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J., 2005. Introduction to management accounting. Upper Saddle River, New Jersey: Prentice Hall.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An organizational and sociological approach. John Wiley & Sons.

Ross, S, A,. Westerfield, R, W,. and Jaffe, J,.2007. Corporate Finance, India, the McGraw-hill.

Simons, R., 2007. Accounting control systems and business strategy: an empirical analysis. Accounting, Organizations and Society, 12(4), pp.357-374.

Ward, K., 2012. Strategic management accounting. Routledge.

Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.

Annual report. 2017. LITHIUM AUSTRALIA NL, viewed Jan 18, 2018, https://lithiumau.wpengine.com/wp-content/uploads/2016/11/30102017-LIT-Annual-Report-to-shareholders.pdf 

Bloomberg. 2018. LITHIUM AUSTRALIA NL, viewed Jan 18, 2018, https://www.bloomberg.com/profiles/companies/LIT:AU-lithium-australia-nl

Morningstar. 2018. LITHIUM AUSTRALIA NL, viewed Jan 18, 2018, https://financials.morningstar.com/cash-flow/cf.html?t=LIT&region=aus&culture=en-US

Yahoo Finance. 2018. LITHIUM AUSTRALIA NL, viewed Jan 18, 2018, https://au.finance.yahoo.com/quote/%5EAORD/history?period1=1451586600&period2=1514658600&interval=1d&filter=history&frequency=1d

Next timing boom. 2018. LITHIUM AUSTRALIA NL, viewed Jan 18, 2018, https://www.nextminingboom.com/company/lit/